State Housing Crisis Looms

Economy: California isn't building enough and is looking less attractive to workers and businesses, study says.

A shortage of housing and soaring home prices are fast emerging as liabilities for California, according to a report to be released today that looks at the state's long-term economic prospects.

Although parts of the Bay Area and Southern California's coastal counties have long been synonymous with sizzling real estate prices, even homes in so-called affordable regions such as the Inland Empire and Sacramento are looking pricey relative to areas such as Phoenix, Salt Lake City, Las Vegas and Portland, Ore. That could spell trouble if California doesn't respond quickly by building more housing to keep workers and businesses in the Golden State, said economist Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy.

"Housing prices are setting records in the middle of a recession, which should raise a red flag about how serious California's housing shortage will be once job growth resumes," Levy said. "It's a major economic challenge, and a serious problem for companies looking to expand and attract workers."

Although job growth and income gains in California have stalled during the last year, Levy's report depicts an economy that's merely pausing before the next big growth spurt.

Unlike the early '90s, when California's defense industry slid into a decline, the state's new economic drivers--high technology, foreign trade, professional services, entertainment and tourism--have experienced only temporary setbacks during this slowdown, Levy said. He expects California to post solid job growth and add an average of about 600,000 residents annually in coming years.

The trouble is that California isn't building enough new housing to keep pace. In 2001, building permits were issued for about 143,000 housing units, with activity down by about 7% through the first two months of 2002, according to the National Assn. of Home Builders. Levy estimates that at least 200,000 new units will need to be built annually to accommodate the state's burgeoning population.

California real estate prices have outpaced the rest of the nation for decades, Levy said, but the disparity has reached an alarming level.

In 1997, California's median home price was about 50% higher than the national figure. Last year, California's median hit $263,700--81% above the national median, according to Levy's data. He said the only other period when the comparison exceeded 80% was during the time of the real estate bubble and subsequent bust of the late 1980s and early 1990s.

But in contrast to that period, when real estate speculation and overbuilding led to a price collapse, Levy said an imbalance between supply and demand is creating the upward price pressure now.

The upshot is that even so-called affordable markets in California are looking less attractive compared with those of economic rivals. In the third quarter of 1997, for example, Sacramento posted a median home price of $116,100 and the Inland Empire $114,300, compared with $152,000 in Portland, Ore. and $128,600 in Salt Lake City, according to the report. In the same period last year, Sacramento's $177,000 median had overtaken Portland's at $174,900, while the Inland Empire's median of $159,700 outstripped Salt Lake City's at $153,000.

Given high land costs, environmental red tape and burgeoning slow-growth sentiment in many parts of the state, Levy said solutions won't come easily. He said policymakers first must consider how to make housing pay.

Proposition 13, the 1978 ballot measure that capped property taxes, cut sharply into the pool of funds cities could use to pay for services. That has led many communities to favor sales-tax generators such as big-box retailers and car dealerships over housing and people, which use services and require costly infrastructure.

Levy said legislators might want to consider giving municipalities a bigger cut of property-tax revenue or some other financial incentives to encourage home building. He said communities likewise will need to come up with new models for high-density housing.

A longtime advocate of investing in infrastructure for California's future, Levy said the state faces several challenges in the coming years, from its jammed airports and packed roads to overcrowded schools and dwindling water resources. But he said the looming housing crisis concerns him most in the short term.